Casten, Whitehouse Urge Fannie and Freddie to Address Climate Risk for Home Mortgages

Washington, D.C. - U.S. Congressman Sean Casten (IL-06) and Senator Sheldon Whitehouse (D-RI) sent letters to Fannie Mae and Freddie Mac questioning the Enterprises on how they assess and manage climate-related risks for the home mortgage loans they purchase and hold.

"The U.S. mortgage market faces severe challenges due to climate-related factors, including underinsurance, increasingly unaffordable or unavailable insurance, the over-representation of under-capitalized insurers in high-risk areas such as Florida, the transfer of high climate-risk mortgages to [the Enterprises], and a high percentage of GSE-backed loans without flood insurance," the lawmakers wrote. "These issues are a result of the destabilizing effects of climate change. We believe that how [the Enterprises] assesses and manages these risks will be crucial in maintaining stability."

In recent months, Hurricane Helene's destructive path across the Southeast has spotlighted the lack of flood insurance coverage in areas that have been historically perceived as 'less risky.' Less than 1% of the inland areas that sustained the most catastrophic damage were protected with flood insurance. Both Fannie Mae and Freddie Mac have identified flood insurance as an important risk mitigation measure for future climate-related losses to their portfolios. However, the GSEs require flood insurance only for their loans in high-risk areas (i.e., FEMA-designated flood zones and coastal areas), and have no stated requirement for medium and lower-risk areas, leaving homeowners unaware of potential flood risks to their property. As a result, there are serious concerns that the real estate markets have underpriced flood risk, where home values do not accurately account for future and increased costs from flooding. This is contributing to the overvaluation of homes, and any correction or home value deflation would disproportionately impact low-income households.

Lenders have responded to this lack of insurance by selling their risky mortgages, including in coastal areas, to Fannie Mae and Freddie Mac in order to avoid bearing the risk that homeowners will default on their mortgages. This only shifts the risk to the federal government, and by extension, the taxpayer. In the event that the federal government needs to bail out Fannie and Freddie through a string of defaults, taxpayers would ultimately pay the price.

Senator Whitehouse, as Chairman of the Budget Committee, last month released a first-of-its kind public dataset and report exposing the scale of the climate change-driven crisis in the homeowners' insurance market. The former chief economist for Freddie Mac had warned the Budget Committee of an impending mortgage market meltdown, noting that "unlike during the experience of 2007-2008, these homeowners will have no expectation that the values of their homes will ever recover."

A copy of the letter sent to Fannie Mae can be found here. A copy of the letter sent to Freddie Mac can be found here.